Your reservations about subprime auto (and auto sales in general) are duly noted. As is your remarkable persistence in expressing concern about America’s now $1 trillion+ auto bubble. That said, Citi’s Mary Kane can remain irrational longer than you can stay worried – to paraphrase the old market adage.

See Mary has been at war with the auto market doomsayers for years (literally). Here’s what she said in a note dated early 2016:

It seems like too many people have seen the movie “The Big Short” and are starting to think the movie heroes’ short strategy would translate to the ABS market. By the way, the ABS conference did NOT take place at Caesar’s Palace that year as per the film, it was at The Venetian. So, it’s not wise to believe everything you see in a movie and hit films are not the best source for trade ideas.

Right. Because the movie confused Caesar’s Palace with The Venetian, you shouldn’t short subprime auto. Makes sense, right?

Mary was even more incredulous in late March of this year when the protagonist from the movie she apparently doesn’t like too much told Bloomberg that although “we are in an environment where credit quality has never been this good in anyone’s lifetime, the one exception [is] subprime auto.”

Yes, “the one exception is subprime auto.”

Well Kane ain’t fuckin’ buyin’ it.

Not from Steve Eisman and especially not from “Steve Eisen,” the saxophonist who Kane mistook for Eisman in a note out last month:

And while we’re pretty sure that “Steve Eisen” was surprised to learn that he was apparently supposed to know something about the ABS market…

…Kane isn’t taking any prisoners. So you know, musicians are both fair game and collateral (ABS pun fully intended) damage in her war on the shorts.

Fast forward to Friday and one the heels of the latest miss for US automakers which saw sales fall for the fourth consecutive month in April…

… and on the heels of a Senior Loan Officer Survey that betrayed tighter lending standards which Barclays thinks “could foreshadow CRE and auto credit quality deterioration,” Kane is back on the warpath, this time with a note that suggests she thinks “Auto ABS” rhymes with “-ness”:

May 2nd marked the anniversary of the Loch-Ness monster legend. Science has not been able to document the creature’s existence, yet the fable perpetuates. Similarly, the media has promoted irrational nervousness about the auto lending market, with little-to-no foundation. The auto ABS market remains solid, with $36bb of YTD supply, including 4 new deals this week. In our view, there’s too much negative hype circulating around the market about the outlook for consumer credit, allegations of weaker underwriting and deteriorating auto credit in particular. The data does not show that underwriting has weakened; in fact it has pre-emptively tightened and we discuss some of the facts in this report.

Senior Loan Officer Survey: tighter auto credit. The Fed’s April 2017 Senior Loan Officer Opinion Survey on Bank Lending Practices included some questions on consumer lending that revealed that a moderate fraction of banks reported tightening lending standards on auto loans during Q1 2017. The Fed’s survey states that “banks tightened most terms on auto loans: A moderate net fraction of banks reported widening the loan spread and reducing the extent to which auto loans are granted to some customers that do not meet credit scoring thresholds. In addition, a modest net fraction of banks increased the minimum required credit score for auto loans.”

Auto OEM discipline. The April SAAR report confirmed a 2nd consecutive month of <17 million unit auto SAAR. Our auto equity team thinks that auto sales have probably peaked yet should not take a dramatic plunge. They project 2019E auto SAAR = 16.0 million. Their recent report also commented that incentives relative to average transaction prices (ATP) meaningfully moderated in April to 11.5%. This compares to 12.5% Q4 2016 ATP and 12.3% in Q1 2017. They further commented that “lease penetration declined moderately MoM which might also suggest a disciplined response to prevailing used vehicle pressures”.

Summary: Ignore the Naysayers

Auto lending continues to experience daily flogging in the market headlines. ABS investors find themselves having to constantly defend their auto ABS investments. One of the rating agencies recently commented that about half of the subprime auto issuers are now reporting higher losses on their 2015 and first half 2016 securitizations as compared with 2014. They point out however, that despite the prospect of higher collateral losses, auto ABS credit ratings are expected to remain generally stable, especially at the higher investment-grade levels.

Writing about a subject is the best
way to educate yourself about it, and when I flick through past work I remember how much
they taught me, if no one else. Mainly they taught me that I didn’t know very much. But they
also taught me that most other people didn’t know much either. Thus, some key themes
which stand out include the illusory control of policy makers, the presumed knowledge of
those looking to them to actively do good, the ease with which we fool ourselves, and how
best to protect capital in the face of such unavoidable uncertainty. -- Dylan Grice